Invest Like A Farmer is the Wall Street market blog by T. H. RAPKO AND COMPANY, LLC’s managing member Thomas H. Rapko. It presents Tom’s insights and thoughts on the markets. Although the author expresses a view on the likely future performance of certain investment instruments, each individual should carefully consider his or her investment position in relation to his or her own circumstances and with the benefit of professional advice prior to making any investment decisions.

Wednesday, December 3, 2014

The Oil Boom (for the Rest of Us!)

Welcome to QE4; $65 bbl oil! Nothing like cheap oil to help a financial farmer's portfolio. Consider rough "back of the envelope" numbers of 0.25-0.50% GDP increase for each $10 bbl oil fall from $100 bbl oil and we're looking at some very rosy numbers indeed.

Frequent readers of this blog know that I've had a Dow 20,000 call on the market for well over a year, specially I'm predicting Down 20,000 by the end of 2016.

If we see sustained oil prices below $65 bbl, well my friends, that would imply S&P 500 earnings of around $1250 forward looking into 2016 and even a moderate P/E of 18 yields…wait for it…Dow 22,500. That's nice.

The fall in oil prices is in effect a MASSIVE tax cut across the board for: gas-car drivers (still plenty of them around), raw material consumers (read as nearly every major non-financial S&P 500 component), and secondary iterations like logistics, transport, and fulfillment.

What's very strange about this existing scenario is given the turbulence in the Middle East many investors would expect $120 to $140 bbl oil right now. Why aren't we seeing this? Two theories come to mind; first, somebody is dumping large quantities of crude on the market at cut-rate prices to raise significant capital. But even that theory wouldn't account for the global sell-off, it's just too amazingly big a move. If we look to classical economics with our good friend Adam Smith, then supply and demand should tell us everything; bottom line there is a glut of oil with middling sustained demand.

Combine the oil QE4 scenario with a dovish Fed poised to keep rates low indefinitely and low inflation (except in health care and education, but why measure those when "tons of soybeans" is available?) as well as a political environment almost guaranteeing gridlock and we're sitting on the heels of another bull run higher.

As the end of the year approaches, this sure looks like a fine time to take stock of your financial farm and adjust allocations accordingly. A quick refresher for new readers of this blog:

Rapko's Rules

1. Boring is undervalued. Look for companies with established brands. If they are exclusive, finite, hard-to-get, vital, addictive, and/or monopolistic, so much the better.

2. I prefer companies that pay me to own them. Specifically, I want to buy companies that pay quarterly dividends that have historically risen over time.

3. Of the four possible outcomes; high margin, high volume is best.

4. A steadily moving higher and higher left to right stock chart is a good thing; the inverse it not.

5. Inevitably, and by definition, more time is spent holding a losing position than is necessary. Cut your losses.